Fall 2011: The New Conforming Loan Limits Are Coming

If you live in a high-cost area, keep an eye on your calendar.

Temporary Conforming Loan Limits Are Expiring

“Temporary loan limits” were enacted in 2008 as part of the government’s economic stimulus package.

At the time, the financial sector was in the early stages of crisis and private mortgage lending had mostly disappeared. Financing was scarce for both refinancing homeowners and home buyers for whom loan sizes exceeded Fannie Mae and Freddie Mac’s national $ 417,000 limit — even for those with excellent credit and income.

The issue was exacerbated in places like Washington, D.C. where huge numbers of homes sell for $ 1 million-plus.

Because private money left the mortgage market, home buyers that were unable (or unwilling) to bring a large enough downpayment to get their respective loan sizes to $ 417,000 or less found themselves without financing.

20 percent down didn’t matter anymore. You had to bring as much money as needed to get to the magic $ 417,000 number.

Enter Congress.

High-Cost Lending Expires After September 30, 2011

In February 2008, to help more Americans get financing, and to help the housing market recover more quickly, Congress agreed to let Fannie Mae and Freddie Mac securitize mortgages for more than $ 417,000, based on local home prices.

Each U.S. metropolitan area was assigned a temporary loan size limit equal to 25% more than its median home sale price. A floor of $ 417,000 was established so lower-cost areas such as Cincinnati, Ohio wouldn’t be punished by the new math. A ceiling of $ 729,750 was applied for everywhere else.

The “variable loan limit” concept proved to be a success and was later rolled into the 2008 Housing and Recovery Act which made “high-cost areas” permanent, but with a slightly different formula. Under the Housing and Recovery Act, loan size limits are equal to 15% more than median home prices with loan sizes not to exceed $ 625,500.

The Housing and Recovery Act limits take effect October 1, 2011 — one day after the original, temporary limits expire.

Loan Limits Affect Both Purchases And Refinances

Starting October 1, 2011, today’s high-cost conforming loan limits will be reduced. Some areas will feel the pain more than others.

Residents of Athens, Ohio, for example — the home of Ohio University — will face a $ 15,500 loan limit size reduction from $ 432,500 to $ 417,000. That’s a manageable 3.6 percent change and local homeowners likely won’t notice much difference.

A home purchase may require slightly larger downpayments to remain “conforming”, is all.

In other areas, though, especially ones like Loudoun County and Fairfax, Virginia; Potomac and Bethesda, Maryland; and Washington, D.C., homeowners will be harder hit. After September 30, 2011, local loan limits will drop from $ 729,750 to $ 625,500.

This means that home buyers will have to bring an extra $ 104,250 to the closing table if they want to avoid having to pay jumbo mortgage rates. Fixed jumbo mortgage rates are traditionally higher than conforming fixed ones.

Get Better Mortgage Rates Before October 1, 2011

If you live in a high-cost area, take note. Mortgage rates may still be low come October, but you may not be eligible for them because of your loan size. Refinancing households should pay attention, too. You won’t be able to refinance a $ 729,750 mortgage to new conforming loan without paying $ 104,250 at your closing toward your loan balance.

It will be like making a downpayment on a refinance.

For everyone — no matter where you live — follow these next steps:

1. Check your area’s conforming loan limit using this online lookup form
2. Use this online form to get a real mortgage rate quote at today’s rates

October 1, 2011 is coming up quick. If you’re buying a home this fall, or thinking of a refinance, make sure you act sooner rather than later. The clock is ticking.

(Post adapted from Bring the Blog)